The Commodity Exchange

A commodity exchange is a market for commodities. Commodities are basic substances such as cotton, wool, timber, rubber, cocoa, sugar, grain, or silver, lead, gold, copper, Zink, nickel, aluminum, or very specific items like plywood, or frozen pork bellies. They never appear on commodity markets physically, and are defined by weight and quality according to the international grades or standards.

As other exchanges commodity exchanges may be spot, forward, futures, or options markets.

Let us consider these principal aspects of the commodity market in greater detail.

Spot markets. The principal commodity is bought and sold on spot markets. The spot price for a commodity is the current cash price. Spot transactions may call for immediate delivery or for delivery on an agreed future date.

Forward markets/contracts. On these markets the commodity is to be delivered at some future date at a price now agreed between the parties to the contract. If the parties think that the price of that particular commodity will rise, they will fix the forward contract price above the current spot price.

Futures/futuresmarket. Futures markets are available for a number of commodities. On these markets commodities a re purchased or sold at a predetermined price for delivery at a specified future date, though physical commodities are not actually delivered. On the terminal date of the contract, the investor (buyer) “will take” the delivery and sell the commodity immediately at the spot price either making a profit (if prices have risen) or losing (if prices have fallen and he was not right in his judgment): as a rule the original contract is offset by a reverse contract before delivery is due.

Futures markets make hedging and speculation possible.

Hedging is a method by which a trader may protect himself against loss through fluctuation in the price of the commodity.

When a futures contract is made, a certain percentage of the value of the contract – the margin – has to be deposited with the broker. The broker, in turn, deposits the margin with the clearing house, which guarantees delivery and payment.

We may speak of the long position and the short position. A person (investor) who has sold a futures contract is “short”, and a person (investor) who has bought a futures contract is “long”. Both investors can offset the contract: the one who is short by a purchase and one who is long by a sale. In both cases, only the difference in price between the two contracts has to be paid.

Options. An option is, in the language of the commodity or stock exchange, the right, obtained by a fee, to purchase or sell shares or commodities at a specified time in the future at a fixed price. The price is fixed on the day the option is taken. There are so called “call” options, “put” options, and “put and call” options.

These are the largest commodity markets in the UK and USA but you should remember that large commodity markets work in many other countries of the world: The Baltic Mercantile and Shipping Exchange, The London Commodity Exchange, The London Corn Exchange, The London metal Exchange, The Liverpool Corn Exchange, The Chicago Mercantile Exchange, The Commodity Exchange of New York, The Minneapolis Grain Exchange, The New Orleans Cotton Exchange.

Ex. III Study the definition of the spot, forward, futures and op­tions, markets given in the text. Make sure that you un­derstand them and can reproduce from memory.

a call option	It is an option which gives the investor the right to buy at the agreed price at any time between the date of the option and its expiry date. It is a buyer’s option.
a put opinion	It is a seller's option which gives the investor the right to sell at the agreed price between the date of the option and the expiry date.
a put and a call opinion	It is a double option to buy and sell. It is useful only when there is a very big 'swing' in the commodity price.
swing	1. 'Swing', in trade agreements, is the limit for reciprocal credit. 2. An unexpected and drastic price fluctuation.

Ex. IV Find the following words and phrases in the text. Translate sentences containing them into your mother tongue:

A commodity exchange, to be defined by weight and quality, standards; spot, forward, futures or options markets; the spot price, the current-cash price, immediate delivery, to fix the forward contract price, to be available, to be purchased and/or sold, at a predetermined price, physical commodities, to be right in one's judgment; to be off­set by, a reverse contract, hedging, fluctuation in the price, a certain percentage of the value of the contract, the broker, margin, to guaran­tee delivery and payment, the long position, the short position, stock exchange, by a fee, a put option, a call option, a put and call option.

Ex. V Fill in the blanks with an appropriate word or phrase.

the market, prices, exchange, consumers, selling, delivery traders, the LME, trading